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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI PAWAN SINGH
PER D. KARUNAKARA RAO, AM: This appeal filed by the assessee on 24.1.2013 is against the orders of the TPO / AO / CIT (A) with the following grounds. “1. On the facts and in the circumstances of the case, the Dy. Commissioner of Income Tax, Range 8(1) and Dy. Commissioner of Income Tax, TP 1(6) (AO) has erred in law and in fact in adding the notional interest amounting to Rs.
16 Crs on the business advances given by an appellant to its Associated Enterprises (AE). Your appellant prays that addition of Rs. 1.16 Crs made under section 92CA(3) shall be deleted.
Without prejudice to the above, the Ld AO has erred in law and in fact in considering rate of notional interest as 12 months average Libor + 300 basis.”
Briefly stated relevant facts of the case are that the assessee gave loans to its Associated Enterprises (AEs) at Singapore and Hong Kong and they are 100% subsidiaries of the assessee. Assessee did not charge the interest on the said loans. The said loans were returned subsequently and the details of loan amounts returned by the AEs and the number of days are given in para 1.1.4 of the order of the CIT (A) and the same is extracted as under:-
At the relevant point of time, such loan transactions were not considered as an „international transaction‟ but for the retrospective amendment by the Finance Act 2012 to section 92B of the Act relating to the “definition of international transactions”, by which an Explanation to the said section 92B was inserted. These amendments were not available to the AO / TPO and the CIT (A) at the relevant point of time. In any case, there is no dispute before us if loan transaction constitutes an international transaction or not. Therefore, the impugned loan transactions are undisputedly “international transactions”. Only issue arising from Ground no.1 relates to whether the said loans attract charging interest by the assessee and if they should be benchmarked as per TP provisions. In this regard, the case of the assessee is that the loans were given out of the assessee‟s own funds, which were freshly collected by virtue of an Initial Public Offer (IPO). Therefore, no interest is chargeable on the said loans. He also submitted that the amounts were repaid subsequently without any interest and therefore, no interest is required to be charged notionally. As per the assessee, it is a case of quasi equity. However, without prejudice, Ld Counsel for the assessee submitted that interest rate applicable should be only the „LIBOR‟ of the respective country, where the loans was consumed. In this regard, he relied on the judgment of the Hon‟ble juri ictional
High Court in the case of CIT vs. Tata Autocomp Systems Ltd [2015] 374 ITR 516 (Bombay), which is relevant for the following proposition:
“Where assessee advanced loans to its AE situated in Germany, rate of interest was to be determined on basis of rate prevailing in Germany where loan had been consumed.”
Further, relying on the decision of the ITAT, Delhi in the case of Bharti Airtel Ltd vs. Addl. CIT [2014] 43 taxmann.com 50 (Delhi – Trib.), Ld Counsel for the assessee mentioned that the Tribunal disapproved the TPO‟s decision in making addition to the assessee‟s ALP in respect of the interest charged by adding higher points LIBOR as balancing the figures towards lack of security. Therefore, he argued for restricting to the LIBOR only of the relevant countries and no further additional interest should be charged over and above the LIBOR.
However, on the other hand, the case of the Revenue is that all the AEs are more or less related and therefore, they are AEs. They share the common shareholdings by virtue of common share holders. It is a matter of difference in percentages of such equity. In some cases, the shareholding is 100% and others, it is less than 100%. In all these cases of transactions between AEs, Transfer Pricing provisions are applicable to all such international transactions. Further, Ld DR also submitted that in view of the binding judgment of the Hon‟ble juri ictional High Court in the case of Tata Autocomp Systems Ltd (supra), there is need for benchmarking of the loan transactions on the basis of the rate prevailing in Singapore and Hong Kong in this case. The details of LIBOR will be supplied by the assessee to the AO during time of giving effect to our orders. Further, it is the case of Ld DR that 2% should be additionally charged over and above the LIBOR of those countries. Relying on the coordinate Bench decision in the case of Melstar Information Technologies Ltd vs. ACIT [2015] 69 SOT 24 (Mumbai-Trib.), Ld DRs submitted the following:-
“Where assessee-company gave interest free loan to its subsidiary company located in USA, Assessing Officer was to be directed to consider arm‟s length rate of interest at LIBOR + 2 per cent.”
We have heard both the parties on this issue and perused the papers placed before us. Considering the above and after hearing both the parties, we find there is no dispute on the nature of loans as „international transactions‟ in view of retrospective amendment cited above. Regarding the charging of interest on such interest free loans given to the subsidiaries, it is now decided issue, by virtue of the above cited judgment of the juri ictional High Court, that the said loan amounts are required to be bechmarked considering the LIBOR of the Singapore and Hong Kong, as the case may be. Now the question is what is the rate of interest which constitutes ALP in this case. It is the decision of the coordinate Bench in the case of Melstar Information Technologies Ltd (supra) that LIBOR + 2% is followed by the Tribunal of Bombay Benches. No contrary decision of Bombay Benches of the Tribunal is brought to our notice by the Ld AR. Therefore, we are of the opinion that AO / TPO is directed to benchmark the impugned transaction by applying the arm‟s length rate of interest at LIBOR + 2% and the LIBOR of the respective countries should be considered. Accordingly, this part of the ground is partly allowed.
Second ground relates to the determination of LIBOR ie whether 12 months average or lesser number of months. The TPO / AO / DRP applied 12 months average of LIBOR in benchmarking the transactions. On the contrary, Ld Counsel for the assessee brought our attention to the above table at para 2 of this order and mentioned that the loan given to AEs in Hong Kong was returned in a short period varying from 45 days to 184 days. In this regard, Ld Counsel for the assessee submitted that the average LIBOR of a quarter or half yearly should be considered. Referring to the loan given to the AE, Singapore also, he pleaded for similar consideration. On perusal of the loans given by the assessee and the date of return of the loans, we find no loan given by the assessee has exceeded one year. Minimum period of loan returned by the AEs is one month. Further, when the period of loans consumed by the AEs is not uniform for applying the uniform average of 12 months LIBOR on all these loans of that countries is prima facie not valid and appropriate. In these circumstances, we are of the opinion, considering the average of 6 months LIBOR of those countries, where loans are consumed, would meet the ends of justice. In any case, this issue was not addressed by the lower authorities during the relevant proceedings. As such, no judicial precedent is brought to our notice on this issue. Therefore, in our opinion, AO / TPO should verify the facts and give an opportunity to the assessee and decide the issue afresh in the light of the above discussion. Accordingly, this part of the ground is allowed for statistical purposes.
In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 30th October, 2015. (PAWAN SINGH) ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक 30.10.2015 व.नन.स./ OKK , Sr. PS
आदेश की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- 3. 4. आमकय आमुक्त / CIT 5. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 6. गार्ड पाईर / Guard file. सत्मावऩत प्रनत //// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt.